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Fund managers luke warm on new index

Philip Macalister

Wednesday 2nd April 2003

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Fund managers aren't tripping over themselves to embrace the Stock Exchange's new NZSE50 index, a survey from FundSource shows.

The exchange introduced the new index just over a month ago and plans to, at some stage, phase out the NZSE40 index.

The new index is a gross measure that includes dividends as well as price movements, while the NZSE40 is a capital index.

FundSource's survey shows that the majority of managers do not see sufficient benefits in adopting the NZSE50 as a performance benchmark.

Nearly 70% of managers said they wold change measures if there was demand for such a move from investors and trustees.

Also there appears to be a bit of a chicken and egg situation going on between managers.

"The decision to change to the NZSE50 will depend on the adoption of the (index) by other industry participants," the group says in its report.

A third factor that may force a change is the discontinuation of the NZSE40.

Managers have expressed concern that the new enlarged index isn't sufficiently diversified. For instance the exchange's biggest stock, Telecom, has an increased weighting compared to the NZSE40. Although another 10 stocks have been added, in total they only represent about 1.5% of the total index capitalisation.

Most managers consider these stocks to be "irrelevant".

"Given the higher transaction and compliance costs to track them, without the justified risk return trade off there is no incentive to track the tail," FundSource says.

It says there are also concerns about the rules for including companies in the index.

Despite these concerns FundSource believes the NZSE50 gross gives a better representation of market returns than the NZSE40 capital on the basis that the gross measure reflects total market returns.

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